What Is A Financial Audit?
Financial audit is conducted to get an opinion if “financial statements” are stated according to specified criteria. The criteria used are usually international accounting standards. However, some auditors may audit financial statements prepared with cash basis or some other basis of accounting proper for the organisation being audited. To provide an opinion on whether the financial statements are fairly stated according to accounting standards, auditors gather evidence to determine if the statements have material errors or misstatements.
Audit opinions are intended to provide reasonable, but not absolute assurance that the financial statements are presented fairly. Or, that they give true and fair view according to the financial reporting framework. The purpose of a financial audit is to give an objective independent examination or assessment of financial statements produced by management, which can increase their value and credibility. This can also increase user confidence in the financial statements, reduce investor risk and reduce the cost of capital of the preparer of the statements.
Auditors must issue an opinion of the financial statements in an auditor’s report. Auditors can issue three types of statements aside from the unqualified or unmodified opinion. An unqualified opinion is when the financial statements are presented fairly. While a qualified opinion is when the financial statement is presented fairly in all material respects in line with GAAP, except for material misstatement that does not extensively affect a user’s ability to depend on the financial statements. Auditors can also issue disclaimers because of insufficient and proper evidence to form an opinion or because of the lack of independence. The disclaimer explains the reasons why an opinion is withheld and clearly indicates that no opinion is expressed. The last type of opinion is an adverse audit opinion which is issued when the financial statements are not presented fairly due to departure from Generally Accepted Accounting Principles or GAAP and these have materially affected the financial statements overall. Here, the auditor must explain the size and nature of the misstatement and should state that the financial statements are not presented fairly in line with GAAP.
A financial audit is usually done by firms of registered accountants. These accountants are usually experts in financial reporting. Financial audits are one of the assurance functions offered by accounting firms. Most organisations have internal auditors, focused mainly on the internal controls of the organisation. External auditors are best if they limit their reliance on the work of internal auditors. Financial audit helps promote accuracy and transparency in the financial disclosures made by organisations and, therefore, reduce concealment of dishonest or unscrupulous dealings.
The benchmark of the audit process is the International Standards on Auditing or ISA. Almost all jurisdictions are required to follow the ISA or the local variation of ISA.
Financial audits are made to increase or enhance the credibility of the assertion of management. They also help show that an organisation’s financial statements represent the organisations position and performance fairly to its stakeholders. The stakeholders of a company are usually the shareholders, but other parties may also be interested in knowing that the financial statements are presented fairly in all material aspects. These include banks, tax authorities, suppliers, regulators, customers and employees.
Financial audit is not designed to deliver absolute assurance. It is only designed to reduce the risk of material financial misstatement whether caused by error or fraud. According to ISA, a misstatement is an error, omitted disclosure or an inappropriate accounting policy. “Material” is an omission or error that can affect the user’s decision.
A financial audit adds value by easing the cost of information asymmetry and reduces information risk. It is required and obligatory for all companies listed on public stock exchanges.
To collect and gather audit evidence some of the methods adopted by auditors include:
- Checking of Postings
- Testing the presence and effectiveness of management controls that prevent financial statement misstatement
- Checking of casting
- Physical count and examination
- Validation or confirmation
- Questioning or inquiry
- Inspection or observation
- Year-end analysis or scrutiny
- Re-calculation or re-computation
- Tracing in the following periods
- Bank reconciliation
- Verification of ownership, existence, value, and title of assets and determining the extent and nature of liabilities.
The Responsibilities of an Auditor
- To give a true and fair view if a financial report complies with accounting standards.
- To conduct financial audit according to auditing standards.
- To give the directors and auditor’s declaration of independence and meet independence requirements.
- To report suspected contraventions to ASIC.
Kingston Knight Audit are the Auditor Melbourne experts to contact when dealing with your trust account audit, SMSF Audit, financial statement audit, and internal audit requirements. Contact us today, Kingston & Knight Audit offers a free telephone consultation to establish how we can best help you achieve the assurance and compliance you require.